Transferring Series EE bond to a charity?

[Deleted]

OK, I'm over my head here. I'm an actuary who got drafted into a church Treasurer job so I have no qualifications whatsoever to give tax advice.

A sweet old lady in my church wants to donate a Series EE bond (about $2,500 with accrued interest) to the church and treat it similarly to a gift of appreciated stock- hand it over, take full deduction for the value of the asset, no taxable income generated. From my reasearch this isn't possible. You can transfer the ownership of a bond but the circumstances are very limited and Form 4000 doesn't look like transferring it to a church is an option. I also found a Private Letter Ruling that said that when you transfer ownership, the accrued income becomes taxable to you. I don't know if she's in a position to itemize. She may not be, since she hinted around at being concerned about the Medicaid look-back period.

She does have a tax advisor, who's the person who told her to try this. My plan is to print off what I've found, put it in an envelope and tell her to discuss it with her tax advisor, but that what she's trying to do doesn't look feasible.

Any opinions? Thanks.

[mwcpa]

from publication 526...

"Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization"

Time for the donor to find a new adviser, they are not current with their knowledge of the law.

But, since the bonds total value is 2500, not all of it is income, there may be little tax cost to her by picking up the income....

[Deleted]

Thanks, mwcpa. I'm still not clear on the meaning of this, but then IRS pubs speak a special dialect of English.

This almost implies that she can assign the bond to us, take a $2,500 deduction and not have to pay taxes on the accrued interest. And it doesn't actually address whether she can transfer the bond over to us. My concern is that she can't because of the limitations on who can get a transferred bond. Form 4000 seems to cover transfers only to people, estates and trusts.

[mwcpa]

"This almost implies that she can assign the bond to us, take a $2,500 deduction and not have to pay taxes on the accrued interest."

She can only deduct the $2,500 charitable gift if she itemizes.....

She MUST report the accrued income on her tax filing, then the value of the bond can be treated as a charitable gift....

Example.... bond has a face of 3,000. the buyer paid 1,500. It is redeemable at 2,500. Upon transfer to the charity the original buyer must report 1,000 as interest from treasury obligations. 2,500 would be an allowable charitable gift, assuming one itemizes deductions.

Not sure what the steps would be to "transfer" the bond to the Church.... it may be simpler to cash it in and give the proceeds to the organization.

[Deleted]

Nov 12, 2011 16:22:47 GMT -5 mwcpa said:

Not sure what the steps would be to "transfer" the bond to the Church.... it may be simpler to cash it in and give the proceeds to the organization.

She's trying to avoid cashing it in because it would then trigger taxes on the accrued interest and, as I said earlier, I'm not sure if she can itemize. It also appeared, although she danced around the point a bit, that she thought a transfer of ownership of a bond might not be caught in a Medicaid "look-back". (She told me all about buying war bonds in HS, so it's safe to assume she's in her 80s.) She's widowed and a bit frail so she may be thinking about nursing-home care. I'm really not thrilled about another member of the middle class relying on Medicaid for long-term care, but at this point it's a bit impractical to suggest that she buy LTC coverage or get a job.

[mwcpa]

"She's trying to avoid cashing it in because it would then trigger taxes on the accrued interest and, as I said earlier"

transferring the bond causes her to pick up any accrued income to that point..... she cannot give away her income tax obligation on this....

[rangerj]

The government bond and the accrued interest are not the same as an appreciated stock. The accrued interest CANNOT be "assigned", but must be reported and then the amount donated can be deducted IF the donor itemizes deductions.

[rangerj]

To add to the above; I looked for an exception to my post as well as MWCPA's and could not find one. The interest income on the bonds has been "realized" but by virtue of the tax code (as written by Congress) is not "recognized" unless the taxpayer is using the accrual method of accounting, or has elected to recognize the bond interest as it accrues. The bond interest must be recognized, if it has not been to date, upon cashing the bond or transferring the bond.

[Deleted]

Nov 14, 2011 20:39:57 GMT -5 rangerj said:

The bond interest must be recognized, if it has not been to date, upon cashing the bond or transferring the bond.

Thanks. That's what it looks like to me as well. I'm going to give her copies of what I found on the Web and send her back to her tax advisor.